Theory-Building With System Dynamics Principles and Practices
Theory-Building With System Dynamics Principles and Practices
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Abstract. System Dynamics is a discipline for the modeling, simulation and control of complex dynamic
systems. In this contribution, the methodology of System Dynamics-based modeling is argued to be a
powerful and rigorous approach to theory-building. The strength of the pertinent process of theory
development lies in its high standards for model validation, and in a combination of abductive reasoning with
induction and deduction. The argument of the paper is underpinned by an application of System Dynamics to
the elaboration of a theory in the new field of Cultural Dynamics.
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Theory-Building with System Dynamics
Challenging and validating (theoretically and empirically) the model and policies
Identifying
Gathering and Formulating Mapping the Providing in-
and Modeling and
describing a dynamic causal loop sights applica-
framing simulating
empirical data hypothesis structure ble for action
the issue
Content • Describing the • Analyzing • Reviewing • Specifying and • Defining the
present situation potential additional documenting criteria for
dynamically causes of the relevant the model evaluating the
• Defining the problem literature • Specifying policy design
purpose and the dynamically • Integrating the various • Assessing
object of the • Generating an isolated scenarios alternative
analysis initial dynamic theoretical • Running policies
• Formulating the hypothesis results of simulations • Deriving
research • Identifying the previous • Visualizing and normative
question(s) key elements of research to a analyzing the recommen-
the theory/ holistic and simulation dations on
model to be consistent results policy imple-
developed theoretical body mentation
Intermediate/ • Reference • Dynamic • Causal loop • Stock and flow • List of criteria
end products behavior pattern hypothesis diagram map for policy
(set of graphs) • High-level • Computer evaluation
• Purpose system diagram simulation • Action plan
statement model
• Research • Report of
question(s) simulation
results
Source: Own representation following High Performance Systems, Inc. (1994) and Sterman (2000)
We take a new view by conceiving of modeling and simulation as a powerful approach to theory-building.
Figure 1 depicts an ideal-typical scheme of that process. Even though this is a general scheme, the process
represented therein is essentially a theory-building process with the sequence of formulating a proposition, then
testing it, expanding or refining the proposition, and proceeding with further tests, etc.
The starting point is a framing of the issue at hand, including a rough definition of the scope and purpose of
the model to be developed. The ensuing collection of empirical data arranged via a first view of reference
patterns then supports the clarification of the goals and the formulation of the research questions to be answered.
Proceeding from this, a dynamic hypothesis can be formed which explains the unfolding of the reference
behavior pattern over time. Besides empirical data, this dynamic hypothesis is also based on theoretical concepts
and constructs which result from previous research efforts. The core of the theory-building process thus consists
in elaborating a theory by drawing on that dynamic hypothesis as well as testing, corroborating or refuting it.
Model quality is successively enhanced and explanation deepened along the path of this iterative process.
In the following, the theory-building along the various stages of this process will be illustrated by instancing
the generation of a holistic and consistent theory about the development of individuals’ musical tastes, especially
their preference for classical music.
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Theory-Building with System Dynamics
the number of pop music listeners decreased by 9 percent. Therefore, the research question to be answered by the
study was: “Why is the classical music audience aging faster than the population as a whole, and why is it
decreasing in size?”
Formulating a dynamic hypothesis: As one possible explanation for the behavior pattern recognized, the
following dynamic hypothesis was formulated: The development of basic musical taste regarding the various
general types of music, e.g., classical music, jazz, pop/rock music, folk music, etc., takes place in a socialization
phase during adolescence.
After that phase, the basic musical taste of an individual remains more or less the same into later life – apart
from a negligibly small number of people changing genre. With pop and rock emerging in the 1950s and 60s,
young people have increasingly been socialized under the influence of these new types of music. Consequently,
the proportions of classical music listeners have been falling from a high level with each succeeding younger
cohort, which is due rather to genuine cohort differences in participation than to any function of demographic
and life-stage factors. This means that the classical music audience will dwindle and die out if no appropriate
counteractive measures are taken very soon.
Mapping the causal loop structure: In the next stage of the SD-based theory-building process, the results of
previous research relevant to the question as to how music preferences develop were reviewed. The existing
research results were thoroughly tested for inconsistencies. Since hardly any contradictions could be identified,
the isolated theoretical results of previous research were put together like pieces of a puzzle, finally adding up to
a holistic and consistent body of theory. We concluded that the extent to which activities with musical relevance
are put into practice (repeatedly listening to classical music, playing an instrument, and attending appreciation
classes) during the socialization phase in an individual’s adolescence determines his or her fundamental musical
orientation with regard to classical music in later life. The reason is that such activities enhance the development
of “listening competence”, i.e., what Behne (1997, p. 151) calls the “cognitive components (‘concentrated’ and
‘distancing’)” of listening. This theory on the development of individuals’ basic musical taste was represented by
means of a causal loop diagram (Hamann 2005: 199).
Modeling and simulating: An SD model is a mathematically formalized version of a theory. According to
Diekmann (2000), there are several reasons for modeling quantitatively: First, it conduces to higher precision of
the theory, e.g., by specifying the connections between variables as algebraic functions. Secondly, hypotheses
can be derived mathematically from formalized theories by which new and surprising insights are often gained.
Thirdly, a model allows of testing the theoretical assumptions for inconsistencies in a more stringent fashion and
facilitates checking the deduction for errors. Therefore, the theory developed so far was specified as a
quantitative model, and many simulations were run. The simulations clearly corroborated the dynamic
hypothesis. In addition, deeper insights into the issues under study were gained, which enabled the elaboration of
well-founded recommendations for the management of orchestras.
Challenging and validating the model (theoretically and empirically): In theory-building, the quality and
robustness of the theoretical propositions developed, i.e., “scientific rigour”, should be the principal concern.
We are taking Karl Raimund Popper's (1959) logic of scientific discovery – essentially a concept of an
evolutionary progress of science – as a benchmark for the design of the theory-building process. This implies
that any proposition must be formulated in such a way that it can be disproved if confronted with reality. In other
words: it must be proposed in such a way that it can be falsified. The reason for this demand for refutability is
that science is advanced by bold propositions or guesses to be subjected to a barrage of criticism. Only
hypotheses capable of clashing with facts are regarded as scientifically legitimate.
Thus, every single equation of the model, i.e., propositions regarding causal relationships, had to be carefully
examined by drawing on additional theoretical and empirical data. The ability of the model to reproduce the
reference behavior pattern is not sufficient. Moreover, as Barlas (1996, p. 186) expresses it, “a system dynamics
model must generate the ‘right output behavior for the right reasons’”, i.e., the internal structure of the model has
to be valid as well. Hence, the model structure was tested by comparing the model structure with the knowledge
about the structure of the real system (direct structure tests) as well as by testing the behavior patterns generated
by the model (indirect structure tests). In a concrete example of a structure test, the proportion of women of
child-bearing age (i.e., between 15 and 45) was assumed to be approximately constant over time. Empirical data
provided by the Federal Statistical Office in Germany revealed that this proportion actually remained within the
very narrow range between 48.5 and 48.9 percent during the time-span from 1978 to 2002. Therefore, the so-
called parameter-confirmation test (as part of the indirect structure tests) was considered to have been passed.
Finally, the behavior replication tests were not applied before each of the various forms of structure test had
been passed. One of the typical tests in this category was a comparison of the time series based on the statistical
3
Theory-Building with System Dynamics
data about the evolution of the German population in the different age brackets, with the simulated values based
on the SD model. The difference between the two is represented in the following formula:
2000
D= ∫
t =1980
a (t ) − s (t ) dt ,
where a is the actual development, s designates the simulated results and D a measure for the divergence
between the two. The subsequent aim was to find a value for s(t) for which
2000
D = Dmin = min
s ∫
t =1980
a (t ) − s (t ) dt .
The test was regarded as having been passed only when the difference was no longer significant.
Modes of scientific inquiry applied: In the first two stages of SD-based theory-building, the dominant
approach is inductive research: First, from particular observations limited to the sample size the age structure of
all classical music listeners in Germany and Switzerland respectively, an imbalance was inferred. Secondly, the
time series analyzed covered the period from 1994 to 2002. The formulation of the (initial) dynamic hypothesis
clearly puts it into the category of abductive research: Eventually, the observed facts were interpreted and
explanatory principles obtained by looking beyond the data, which is the very essence of the abductive approach.
Finally, integrating the existing theoretical research results into a consistent theory is a deductive process. This is
because particular statements regarding the development of an affinity with classical music are concluded from
existing theories which are considered to be universally true. In turn, these theories were accepted as universal
truths after they had been inferred inductively from particular empirical observations and had withstood a variety
of attempts at falsification. This makes it clear that the different modes of scientific inquiry are inextricably
bound up together when one is generating theories based on SD methodology.
4. Conclusions
Theory-building is more than an exercise for academics. It is also an indispensable device for practitioners in
organizations, allowing them to test their assumptions and bring their speculations down to earth in order to
make better decisions. That is why theory-building is a fundamental prerequisite for effective action.
The SD methodology is a powerful and rigorous approach to the development of theories. This is underpinned
by its exceptionally high validation standards: Bold guesses, i.e. abductive theory-building, first crystallize in
theory, the model then being submitted to numerous tests. Among the methodologies for the modeling of social
systems, none, as far as we know, has validation standards as strict as those for SD. For instance, econometrics
operates essentially with statistical validation procedures. In SD, the standard procedure for model validation
also involves statistical tests, e.g., the comparison of time-series of data representing the object system versus
those generated by the simulation. In order to avoid a model’s being considered right for the wrong reasons, SD
validation includes a whole set of obligatory procedures designed to build up confidence in a model (see: Barlas
1996, Sterman 2000). The abductively acquired elements of the theories therefore do not remain merely
speculative, without empirical corroboration.
We have reported an application of SD to the construction of a theory of Cultural Dynamics, from which
substantial insights and recommendations for the management of cultural institutions have been derived. Other
cases in point have already been published, e.g., Ulli-Beer (2004) and Kopainsky (2005).
The SD methodology for modeling, simulation and control is in line with the concepts of evolutionary theory-
building as proposed by the theory of science. It must be added, however, that it is also highly appropriate for
applications, owing to its intuitive techniques and the user-friendly software available.
Summing up, one may say that the potential of SD as a methodology for theory-building is exceedingly high.
4
Theory-Building with System Dynamics
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